Crude Oil by Rail Also Faces Tough Future

Much has been made about falling coal production in the eastern United States and its adverse effect on railroad traffic, yet the shipment of crude oil by rail is also facing a tough future.

Crude oil production in the Niobrara shale region of Colorado and Wyoming is in decline, having peaked in April 2015 and a report by RBN Energy LLC analyst Sandy Fielden predicts that pipelines are going to rob rail of a significant amount of crude oil from that region which now moves by rail.

train image2An Energy Information Administration forecast said that falling crude oil prices and lower drilling activity has meant that crude production in the Niobrara shale region is likely to fall to 388 million barrels a day through March 2016. Peak production in April 2015 was 491 Mb/d.

Fielden told Railway Age magazine that midstream companies continue to add pipeline capacity in the region, which is causing a diversion of crude oil away from rail.

Rail shipments of crude oil peaked in December 2014, but Fielden said that rail terminals to handle crude oil continue to be built.

Fielden has published a report titled Slow Train Coming – Terminal Projects Still Being Built As Rockies Crude-By-Rail Fades that says that crude oil by rail volumes are falling across the United States and Canada.

“The decline is mostly in response to narrower spreads between U.S. domestic crude benchmark West Texas Intermediate and international equivalent Brent,” Fielden wrote. “The lower the spread between these two, the lower the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines.”

After Congress last December lifted regulations that limited U.S. crude oil exports, West Texas Intermediate crude began to trade at a slight premium to Brent crude, which averaged $0.26/Bbl in January.

Fielden said that the narrowing of prices between West Texas Intermediate and Brent resulted in crude oil by rail volumes in the United States falling by 20 percent between November 2015 and January 2016.

However, Fielden said the decline was slower than expected because shippers and refiners continue to rely on rail to move crude oil out of the Bakken region of North Dakota. This may be, in part, because shippers and refiners have investments in rail infrastructure and because some routes still do not have pipeline access.

Most of the oil being moved out of the Niobrara region by rail is bound for the Gulf Coast, where more than half of the U.S. refinery capacity is located.

Just 20 percent of Niobara region oil was shipped by rail to the East Coast in 2014, a figure that fell to 17 percent in 2015.

In the meantime, construction of new rail loading terminals continues in Wyoming and Colorado.

Fielden’s report said those facilities were planned before the price of oil fell and probably reflect a belief that crude oil by rail will still have a role to play in the longer-term development of Rockies crude takeaway capacity.

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